Gold & Silver: Backwardization & Conclusion

by Wes Bridel on September 9, 2013

in Economic Updates

The gold and silver markets have had a crazy year with big drops in US dollar prices and a big bounce from the lows.  We’ve been discussing these markets here and here.  Today we’ll look at another big issue and conclude the focus on silver and gold before moving on to other topics…

Backwardization

This is why the gold futures prices have been in backwardization for months now.  This is unprecedented.  As it stands now, the market will pay you to hand over your gold bars today and collect new ones in the future.   (We’re talking big bars here, this isn’t something you do with an ounce of gold).   Typically, you have to pay to lend out your gold for the use of cash.

For some time now, the market will pay you a premium, give you this use of cash (again, with interest), if you will wait to have your gold delivered in the future.  So this seems to clearly indicate that a lot of people are not comfortable with the idea that they will actually get that gold back in the future.  Anyone would take this deal if they were certain they would get the gold back.  But a small premium is not worth it if you expect your gold to go up dramatically in value and you’re not sure you’ll actually get the gold back when the deal is supposed to complete.

To be fair, it might also be because people the premium in Asia is high enough that people are sending their gold their instead.  But either way, it’s not a good sign for the health of the West.  And is a sign of looming issues in the gold market.

So where do we stand today?

So we’ve covered the historical precedent for gold to rise dramatically after a big fall within a secular bull market.  And we’ve given you the reason why this should happen again.  We’ve discussed some of the major warning signs which should alert you to the explosive nature of the coming move in gold and silver.  (We’re not going to talk in this set of posts about supply/demand characteristics that we’ve discussed before other than to point out the weird delivery defaults that are going on with the biggest banks in the world.

Oh, we did forget to point out that the rumor is that the price plunge earlier this year coincided with the rumor that the LBMA was about to have to default on gold delivery.  This would be a pretty big deal considering that is the largest physical gold exchange in the world be far, and they would have been admitting that they didn’t have gold to deliver.  So, if that’s true, then the price was smashed so that they didn’t have to deal with that nasty problem because the market started coughing up gold contracts to those who needed to deliver them.

Anyways, we’ve had a couple years consolidation in gold and silver.  And now we’ve seen a strong bounce off of the bottom of two months ago.  And now we’re heading into what is traditionally the strongest 6 months of the year in gold prices.  This to me looks like an excellent time to make sure you own the proper amount of gold and silver.  You could see a nice run up in the US Dollar value of your money.  But even if this happens, remember, you didn’t make anything, you still own the same number of ounces!

That’s not to say the price can’t be smashed again.  If we equate this current bull market run to that oif the 1970’s that we discussed last week, then the price would need to run down to $950 or so (half of the high point previously reached).  Now, there’s nothing that says we will follow that previous pattern, but it shouldn’t alarm you if we do.  We feel confident that gold and silver will be a very safe place to keep some money over the breadth of this “Coming Storm”.  And there’s a very good chance that the USD price will be going much higher within 6 months from here.  This seems like a very safe time to enter the market especially if you don’t own any (or enough) gold or silver yet.

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Donny @ Personal Income 10.19.13 at 10:32 am

I strongly believe that gold and silver will come out a winner in this whole economic situation, it is just a matter of when the truth of the current state of the economy finally sinks in with reality. I think when inflation starts to hit, the wealth cycle of precious metals will increase dramatically.

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